CMA_P1_SectionA_FC Flashcards
CMA Part 1 Section A
Who are direct users of financial statements?
Direct users are directly affected by a company’s financial results and stand to lose money if the company has financial problems.
Direct users include investors and potential investors, employees, management, suppliers, and creditors.
Who are indirect users of financial statements?
Indirect users are people or groups who represent direct users.
Indirect users include financial analysts and advisors, stock markets, and regulatory bodies.
What are the five financial statements?
- Balance sheet (also called the statement of financial position)
- Income statement
- Statement of cash flows
- Statement of comprehensive income
- Statement of changes in stockholders’ equity
What does the balance sheet show?
The balance sheet provides information about an entity’s assets, liabilities, and owners’ equity at a point in time.
What are the elements ofthe balance sheet?
- Assets
- Liabilities
- Equity (or net assets)
What is the proprietary theory?
Proprietary theory is the way that the balance sheet presents the assets, liabilities, and equity, showing that the net assets belong to the owners of the company.
What is an asset?
Future economic benefits obtained or controlled by an entity as a result of past transactions or events.
What is a liability?
Probable future economic sacrifices of economic benefits that arise from the present obligations of the company to transfer assets or provide services to other entities in the future as a result of past transactions or events.
What is equity?
The remaining balance of assets after the subtraction of all liabilities. This is the amount of the company’s assets that are owned by and owed to the owners.
What are current assets?
Assets that will be converted into cash or sold or consumed within 12 months or within one operating cycle if the operating cycle is longer than 12 months.
What are current liabilities?
Obligations that will be settled through the use of current assets or by the creation of other current liabilities.
What are the six categories of equity?
- Capital stock
- Additional paid-in capital
- Retained earnings
- Accumulated other comprehensive income items
- Treasury stock
- Non-controlling interest
What does the balance sheet help assess?
The balance sheet provides a basis for computing rates of return, evaluating the capital structure of the business, and predicting a company’s future cash flows.
The balance sheet helps to assess the company’s liquidity, financial flexibility, solvency, and risk.
What are some of the limitations of the balance sheet?
- Many assets are not reported on the balance sheet.
- Values of certain assets are measured at historical cost.
- Judgments and estimates determine the value of many items reported in the balance sheet.
- Most liabilities are valued at the present value of cash flows discounted at the rate that was current when the liability was incurred, not at the present value of cash flows discounted at the current market interest rate.
What does the income statement show?
The results of a company’s operations during a given period of time.
What does the income statement help assess?
The amounts, timing, and uncertainty of (or prospects for) future cash flows.
What are the four elements of the income statement?
- Revenues
- Expenses
- Gains
- Losses
What are revenues?
Revenues represent inflows of assets or reductions in liabilities as a result of delivering goods or providing services that are the entity’s main or central operations.
What are expenses?
Expenses are outflows of cash or other assets or the incurrence of liabilities as a result of purchasing goods or services that are necessary to provide the entity’s main or central operations.
What are the three methods of recognizing expenses?
- Cause and effect
- Systematic and rational allocation
- Immediate recognition
What is matching?
Revenues should be recognized in the same period as the expenses that generated those revenues are expensed.
What are gains?
Increases in equity as a result of transactions that are not part of the company’s main or central operations and that do not result from revenues or investments by the owners of the entity.
What are losses?
Decreases in equity as a result of transactions that are not part of the company’s main or central operations and that do not result from expenses or distributions made to owners of the entity.
What is a discontinued operation?
A disposal of a component or group of components that is either disposed of or held for sale and represents a strategic shift that has or will have a major effect on the entity’s operations and financial results